THE BLOG
06/23/2014 11:05 am ET Updated Aug 23, 2014

America Does Not Negotiate With Drug Companies

Roc Canals Photography via Getty Images

A few years ago, I began to buy some of my prescriptions from an online pharmacy in Canada. At my local pharmacy, my prescription was costing me about $60 a month, even with insurance. I noticed that I could buy a three-month supply from an online Canadian pharmacy for $90, plus $20 of shipping costs, almost a 50 percent savings.

I did a little bit of digging about the legality of this, and evidently the U.S. government does not enforce a ban on the importation of prescription drugs for personal use for more than a three-month supply.

But this got me wondering why Americans put up with spending so much more on prescription drugs than other industrialized nations. Generally speaking, things are cheaper here -- luxury goods, gasoline, and food because of government subsidies and lower tariffs. Consumption is 70 percent of our economy. We like shopping for things, and we like it when it's on sale.

Why, then, are we okay with the fact that we pay 50 percent more for prescriptions drugs than countries like Canada, France, and the U.K.?

Well, it has to do with our red-blooded American capitalist mentality.

You see, other industrialized countries negotiate prices on prescription drugs. Most of them have socialized medicine, so they negotiate prices in huge volumes with enormous buyer power. The U.S., on the other hand, prohibits Medicare from negotiating on drug prices. It sounds crazy, but it's true. Generally speaking, drug companies tell Medicare how much it costs to manufacture a drug and Medicare adds some kind of acceptable margin, an approach known as cost-plus-pricing. Unfortunately, many hospitals base their prices for other customers on what Medicare reimburses, so this pricing scheme sets the tone for the entire system.

In essence, Americans subsidize drugs for the rest of the world even though we grant over $30 billion a year to research and develop new biomedical advancements through the NIH, the biggest source of research money in the world.

Drug companies will say that without the premium that Americans pay, they wouldn't have an incentive to develop new life-saving drugs. They say that Americans get access to drugs one to two years before other countries. They say that it's more expensive to provide drugs in America because marketing costs are higher in the U.S. (mainly because other countries limit how much marketing and selling drug companies can do).

Most importantly, drug companies claim that if Medicare would be allowed to negotiate prices on drugs, it would make the drug business suddenly unprofitable or at least less profitable. This point, of course, is very difficult to prove, but a terrifying consequence nonetheless. Drugs save lives, so there's a moral imperative to keep the pharmaceutical industry thriving.

It's hard to say which reality would cost more lives -- keeping the cost of drugs high for Americans or eliminating the incentive to develop new drugs for America and the rest of the world? Either way, it feels like Americans were never asked which reality they prefer. It seems like the U.S. drug industry, along with their friends in the Congress, made the decision "for our own good."